10/06/2009 @ 6:00AM

Tech To Prosper In 2010

2010 could be a very good year for tech, as pent-up demand across all businesses could in turn lead to fairly substantive purchasing, our industry observers believe. Names big and little should benefit, as old systems are upgraded and replaced.

Part of what stirred this conversation were statements from
Hewlett-Packard
management in late September. The execs expect technology spending to improve substantially in fiscal 2010, and that sales at the blue-chip firm could rise by 3%. Chief Executive Mark Hurd told Wall Street that he expects to see the firm’s core business of personal computers, services and printers outstrip the larger market.

When HP speaks, people listen, as the firm is both a longtime tech bellwether and a member of the Dow Jones industrial average.

As for why spending is expected to increase in 2010, it’s partly due to an improving economy and it’s partly because so many firms have lacked the wherewithal to make the purchases they’ve needed, says Marc Lowlicht, the head of the wealth management division at Further Lane Asset Management. “A large number of small to medium-sized firms have outdated hardware and software, many of which were last upgraded for Y2K,” he says. “This occurred 10 years ago, and by technological standards it might as well be 100 years ago.”

As tech and IT spending was held off, demand has become pent-up, and Lowlicht expects the cork to pop this year. But Lowlicht’s not the only one who feels this way. Indeed a far more persuasive case is currently being made by
Microsoft
, courtesy of a new white paper’s it has sponsored, with research conducted by global market intelligence firm IDC.

IDC analyzed worldwide information technology demand and states that IT spending should be $1.4 trillion in 2009 and rise to $1.7 trillion by 2013, an increase of 21%. IT jobs are also expected to rise by 5.8 million in four years, even as overall job growth in the larger world economy remains anemic.

It goes without saying that IDC expects Microsoft to benefit from this spending bonanza, but HP could as well. Standard & Poor’s rates it a “strong buy” and expects the firm to gain share in IT services, as well as in hardware going forward.

Ronald Roge, founder of R. W. Roge & Company, says tech spending hasn’t really been hot since Microsoft launched its XP operating system back in 2001. He expects HP to be in a good position to benefit from this, courtesy of its $399 laptops.
Cisco Systems
will also have the wind at its back going into this cycle, he believes.

Getting away from the big boys, Hilary Kramer, chief investment officer of A&G Capital Research, adds that smaller software companies, and even companies that trade shares over-the-counter, could also benefit going ahead, boosted by increased government spending. “We will see the smaller software companies … that specialize in ‘cyber-security’ and ‘improved efficiencies’ of all types benefit immensely from all of the government stimulus self-directed spending on the various government agencies spanning from NASA to the NSA to the Department of Labor to, yes, the TREASURY,” she e-mailed.

Some small-cap tech names Forbes has recommended in the past include SkillSoft Public Limited, Syntel and Synnex. In the cybersecurity world, small- cap firms
Websense
and
Blue Coat Systems
could also be worth a look. The former is up 9.5% year-to-date, with a $724 million market cap, the latter is rated “outperform” by Thomson Reuters, and is up 164% in that time.

Tech’s Good Year

Forbes: Apparently Hewlett-Packard is feeling very good about the year to come. They expect tech spending to rebound in 2010 and that their revenues should be lifted by 3%.

Hurd also told Wall Street that HPQ expects to see its core businesses of PCs, services and printing to outpace the wider market, and that they’re in great shape to reap the benefits. What do you make of HPQ’s optimism? And if HPQ is in good shape, assuming you believe that, what other tech firms will also benefit?

Marc Lowlicht: I expect the technology sector as a whole to benefit from the improving economy. A large number of small to medium-sized firms have outdated hardware and software, many of which were last upgraded for Y2K. This occurred 10 years ago and by technological standards it might as well be 100 years. A large number of small to medium companies as well as local governments that were operating on tight budgets have held off spending in this area. With the economy improving and pent-up demand I would expect increased budgets for technological expenditures as it tends to improve efficiency, productivity and margins having a direct impact on earnings.

Hilary Kramer: Marc really covered this answer comprehensively. I can add that we will see the smaller software companies (that trade on Nasdaq or that are even OTC) that specialize in “cybersecurity” and “improved efficiencies” of all types benefit immensely from all of the government stimulus self-directed spending on the various government agencies spanning from NASA to the NSA to the Department of Labor to, yes, the Treasury (especially if this overhaul and super-agency is really created). Imagine the benefit to those tech companies that will be part of the spending to revamp health care! This will create a mini-bubble/boom of businesses and small companies that will finally get their big break (I hope).

Ron Roge: Moore’s Law states that the microprocessor speed doubles every 18 months, and the price is cut in half. Since Y2K stuffed the technology update pipeline into a single year, 1999, technology sales were low for several years thereafter, then it picked up again when Microsoft issued the XP application in late 2001. Those machines are now overdue for replacement. In addition, business is looking at new technology to become more efficient, so they won’t have to add employees as the world recovers from the global recession. HP is also a big player in the new very small laptops that are used for travel. Basic functions and access to the Internet in a very small package. Some of these machines are selling for $399 at Costco. So it looks like HP will have the wind at its back and their optimism is probably justified. Cisco should also benefit from this upgrade and replacement cycle.

Forbes: Given the continued bad news coming from the economy is there any chance that HPQ, and its brethren, will suffer as companies can’t afford to update their systems?

Roge: We recently had to replace the server in my office. It was seven years old and one of the hard drives failed. It was not an expenditure I expected to have this year. My IT guy said that my desktop is seven years old. He also informed me that half the machines in the office are between five and eight years old and that I should budget to replace all of them next year. If we did not have a weak economy, I would normally have replaced these machines after five years of service. I think my business is typical of many businesses around the world. We delayed IT expenditures because the machines continued to function. Eventually, computers will break down, and they will have to be replaced. I think it is reasonable to expect that HP and the technology sector will be the beneficiaries of this delayed replacement trend.